Losing at the money game

It's always amusing to see the alma mater -- soon to be, anyway -- in the press. And last Sunday's New York Times was particularly rewarding. The first piece I saw was a 3,000-word story on the unprecedented growth of American university endowments in recent years because of a willingness on the part of school officials to accept greater risk during the great bull market of the late 1990s. It chronicled the growth of Duke, Harvard and Yale universities' unparalleled endowment gains from nontraditional investments like venture capital and leveraged buyouts. Last year, Duke's endowment was up 59 percent; Notre Dame, 58 percent; MIT, a respectable 50 percent; and Harvard, 32 percent, to $19.2 billion. Over the last five years, most major universities have pursued more aggressive investment strategies, and it seems to have paid off. Six other universities netted gains above 40 percent. And where was Penn mentioned? At the end of the story, as an example of how not to invest an endowment. During a time when college endowments have skyrocketed, Penn's went Chernobyl. During Fiscal 1999, Penn's once-respectable sum of $3.2 billion lost about $60 million, or 1.8 percent of its value. The loss was attributed to our longstanding policy of value investing, buying beaten-down stocks whose financial positions and long-term prospects make them appear undervalued. Although Penn was well served by this policy in the '70s and '80s, we should have jettisoned the policy years ago, about the same time that we got rid of 50 percent admission rates. Penn Vice President for Finance Craig Carnaroli was quoted recently as saying, "Why change the horse that's been working for you? You can't fault us for sticking with what works." Mr. Carnaroli, we absolutely can fault you. Sir, my cousin's elementary school class opened an E*Trade account last year and played the market. They understand growth investments; their holdings grew 28 percent over the course of the fourth grade. To Penn's credit, it has moved in the last couple years to change its strategy from value investment to growth investment, but wait.... Growth investments suffocated like a beached whale over the summer. Did anyone else notice Nasdaq fell below 3,000 last week? The Times writes that our new policy faces "the danger of buying overpriced investments just as their value is beginning to fall." And they're right. As of late, Penn has been following the leader on a number of fronts. Yale has residential colleges, and we repackage our Soviet-style gulags. MIT has an incubator, and we create P2B. Our peers have 40 percent returns on their endowments, and again we try to follow. What happened to the days when we led? When Penn built the first law school, the first medical school and the first business school? Apparently we still lead in some things -- and not just crime; the second article in last Sunday's Times spotlighted President Rodin, as she again led the nation in salary and benefits among university presidents. All the better for her; it is always good to see a woman paid well in a field where women have been underrepresented and in a world where women still earn 77 cents for every dollar men earn. For the most part, Rodin has greatly improved Penn, particularly the appearance and our reputation in publications like U.S. News & World Report. Her legacy is secure; during her tenure, Penn has experienced a mini-renaissance and shaken its "safety Ivy" reputation. Things will only improve if all of her projects, like the massive dorm and dining renovations, are finished. In my short time at Penn, I have witnessed a transformation of Penn's campus. When I arrived here there was no Sansom Common, no Huntsman building, no Addams Hall and certainly no neo-fascist architecture in Wynn Commons. And when I arrived, Penn's endowment was $2.9 billion, and today it is $3.2 billion. When I was rejected from Harvard, its endowment was $9 billion; today it's $19.2 billion. Regardless of our new investment strategy, even Rodin is bearish about our prospects, recently saying that "we are never going to recoup that period of private equity payout." Maybe we will, maybe we won't. But unless Penn starts concentrating on making sure it is in the top 10 of university endowments -- we fell from 12 to 18 last year -- and not just magazine lists, all of Rodin's current efforts will be in jeopardy. And we will end up reading a lot less about Penn in the papers.

Please note All comments are eligible for publication in The Daily Pennsylvanian.